The Power of Choice: Part II

Electricity deregulation leads to lower power bills, better state competitiveness

In Texas, electricity prices for residential customers are up to 17.5 percent lower today than they were in 2002.

In Nevada, on the other hand, electricity prices for residential customers are 31.1 percent higher today than they were in 2002.

Astounding?

It is. Texas' low prices are precisely what a free, open and competitive market for retail electricity can produce. Nevada's high prices are precisely what a regulated, closed and government-mandated monopoly for retail electricity will produce.

In 1999, Texas lawmakers passed Senate Bill 7, which laid out a process to open that state's electricity market to full retail competition by 2002. Today, as a result of that legislation, consumers can choose from among many competitive providers of retail electricity based on cost, structure and renewable content. The Public Utilities Commission of Texas operates a website, at www.powertochoose.org, where consumers can shop from among many competitive providers to find a product that matches their particular preferences. They can select the provider that best caters to their needs in the same way that they can select from among different fast-food restaurants, automobiles or laundry detergents.

Imagine that: a free market in electricity! And it works.

So how have private electricity providers in Texas been able to achieve this miracle? Did lawmakers there scrap the state's environmental or safety regulations? Did they gut the state of expensive renewable technologies? Are the private electric retailers dumping toxic chemicals into the drinking supply?

Of course not.

In fact, private retailers in Texas have shown that they can generate a significant share of the electricity mix using renewable sources even without government mandates. Instead, on the competitive market, advertising high renewable content has become an important marketing concept to attract customers. So, entrepreneurs have discovered innovative ways to bring renewable electricity to market in order to satisfy consumers' desires — rather than to just satisfy government mandates.

You see, when consumers are free to choose, producers must compete against one another for customers — leading entrepreneurs to strive to increase product quality and develop new products or more efficient methods of production. Such innovation, or improved technical knowledge, has long been the key to ever-improving living standards for the human race.

Most humans, for example, no longer occupy their day trying to provide their next meal by beating animals over the head with a splintery club. Instead, even the poorest individuals in modern capitalist societies carry cell phones. They have access to the latest news via high-definition televisions or the Internet. They eat genetically engineered, high-yield grains and season them with spices from half a world away — a luxury once reserved for only the very wealthy.

This transition from clubs to cell phones was possible because entrepreneurial individuals throughout history have — when unimpeded — sought out the means to profit themselves by bringing to market innovative new products or production methods that improve human lives. Electricity entrepreneurs in Texas have shown that, when allowed to compete, they can do the same to supply the state's power needs.

When some form of government protection shields firms from competition, however, their need to innovate diminishes. Consumers' welfare — and that of society at large — is damaged. Yet politicians for centuries have made deals to benefit special interests by conferring monopoly privileges on the well-connected.

Indeed, Nevada and most other states have blocked the free and open competition in electricity markets that benefits Texans — giving regional monopoly providers government exemptions from the discipline of markets.

At one time, such decisions were justified by a faulty economic theory, which said electricity markets constituted a "natural monopoly" that government must protect. For at least 35 years, however, academic economists — including many on the political Left — have recognized that this theory is flawed, and that electricity markets function best under conditions of open competition and consumer choice. Indeed, Texas proves this point.

Government-protected monopolies are not only inefficient in the electric industry. Consider education. Many parents in Nevada are aware of the degenerating quality of education that results when they — as consumers of educational services — are deprived of choice about where to send their children for schooling. When lawmakers confer regional monopoly status on public school districts, they destroy the natural market incentives that encourage educators to innovate in order to attract students. As Nevada parents have seen, the result is a deteriorating quality of the educational "product" even as the "prices" consumers are forced to pay through their taxes increase substantially.

Silver State lawmakers should learn that the same lesson applies to electricity markets, and use this lesson to pass legislation akin to Texas' Senate Bill 7.

After all, electricity markets, like individuals, want to be free.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.

Issues

Geoffrey Lawrence is the Director of Research and Legislative Affairs at NPRI. Geoffrey is a frequent commentator on public policy in print, radio and television news in Nevada and his work appears regularly in publications around the state and the nation. He is noted for having developed comprehensive proposals for reform of the state revenue structure, budgeting methods and spending habits.